Pay-Cap Populism

In his first week as president, Barack Obama cited years of “greed and irresponsibility on the part of some” as a major contributing factor behind our economic meltdown. In his second week, he denounced Wall Street’s latest round of multibillion-dollar bonuses as “shameful.” In his third week, he proposed what amounts to a “maximum wage,” a $500,000 cap that would apply to at least a few banking executives lining up for a share of the exceptionally large TARP bailout.

So what can we expect for an encore? When he announced his executive wage cap, Obama gave us a clue. The president promised to launch a special “long-term effort” to examine “broader reforms” around executive pay.

Presidents typically convene such “long-term efforts” to kick the public policy can down the road until an energized public loses interest. Let’s hope this one proves different. We desperately need a sober, thoughtful review that can get us past the muddled clichés that dominate the CEO pay debate.

Obama’s remarks so far, unfortunately, have done precious little to clear up matters. At one point in his announcement, he seemed to swallow whole the conventional take that stratospheric pay levels are just fine as long as executives are meeting the criteria for performance “success” as corporate boards so narrowly define them. “This is America,” Obama observed. “We believe that success should be rewarded. But what gets people upset–and rightfully so–are executives being rewarded for failure.”

But other comments by the president hint at a much deeper understanding of the danger inherent in the enormous rewards that have metastasized across corporate America. “Lavish bonuses,” Obama noted, are enabling a “culture of narrow self-interest and short-term gain at the expense of everything else.” Executive pay excesses “have contributed to a reckless culture and quarter-by-quarter mentality that in turn have wrought havoc in our financial system.”

So what should we be battling: rewards for CEO “failure” or “lavish bonuses”? The answer makes a difference.

If the problem does boil down to paying for failure, then we ought to empower shareholders. Give them a “say on pay”–the right to take advisory votes on executive pay packages–and, mainstream reformers claim, corporate boards will end their wasteful ways.

But if the problem revolves around the size of the rewards, then the solution demands more robust government action. Obama’s $500,000 cap moves us a tiny, mostly symbolic step forward. Gaping loopholes abound. The cap applies only to failing firms that in the future will receive vaguely defined “exceptional assistance.” And even these few firms will be able to reward top execs with unlimited millions in restricted stock they can claim once the firms repay the government. Shouldn’t the rewards go first and foremost to the taxpayers, who are bankrolling recovery?

We still, in short, have plenty of work to do to end bailout profiteering. Apologists for our corporate order, naturally, will howl if the administration dares to do it. In a “free society,” they’ll fume, government has no right to place limits on private corporate behavior, no right to “dictate” how much corporations pay their power suits.

In reality, we mandate limits on corporate behavior all the time. We limit how much pollution corporations can spew out. We limit the chemicals companies can sneak into their products. We limit the hours they can force employees to labor. We set these limits because we recognize that irresponsible corporate behaviors threaten our communities.

Excessive executive pay, the Wall Street meltdown has demonstrated ever so vividly, endangers our public well-being as surely as any pollutant. Jackpots have become so huge that executives will do anything to hit them. They’ll even drive our economy into the ditch.

Most Americans seem to get it. That’s why Senator Claire McCaskill of Missouri electrified the nation on January 30 by blasting the “idiots” of Wall Street and proposing a $400,000 pay cap at all bailed-out companies. The Senate, on a voice vote, adopted the proposal after McCaskill and Senator Bernie Sanders offered it as an amendment to the stimulus.

This $400,000 equals the salary of President Obama, who’s making about twenty-five times more than the government’s lowest-paid worker. Peter Drucker, the founder of modern management science, considered twenty-five to one an appropriate ratio for the private sector as well. Larger gaps, he argued before his death four years ago, undermine enterprise effectiveness and efficiency. In 2007, big-time CEOs made 344 times what the average US worker took home.

The twenty-five-to-one ratio ought to become our national pay standard, not just for bailed-out companies but for all enterprises that get government support, whether through contracts or subsidies or tax breaks. Last year Mark Hurd, Hewlett-Packard’s CEO, took home $42.5 million. HP’s biggest subsidiary gets more than $2 billion a year in federal contracts. Our tax dollars are, in effect, subsidizing CEO pay windfalls.

How do we start reversing this outrage? California Representative Barbara Lee is pushing legislation that would cap the amount of executive compensation firms are permitted to deduct from their corporate income taxes at twenty-five times the pay of their lowest-paid worker. If that became law, corporations could opt to continue paying their top executives tens of millions of dollars a year. But they would have to find somebody other than taxpayers to help them foot the bill.

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Sarah Anderson is the global economy project director of the Institute for Policy Studies in Washington, DC, and author, with John Cavanagh, of the report, “Lessons of European Integration for the Americas,” available at www.ips-dc.org. She is also the author (with others) of Field Guide to the Global Economy (New Press) and Alternatives to Economic Globalization: A Better World Is Possible (Berrett-Koehler). Sam Pizzigati is an associate fellow at the Washington, DC-based Institute for Policy Studies and edits Too Much, an online weekly on excess and inequality. They are co-authors of Executive Excess, a yearly report on CEO pay.

Further Reading:

Sarah Anderson directs the Global Economy project of the Institute for Policy Studies and is a member of the New Economy Working Group.
Sam Pizzigati is an associate fellow at the Institute for Policy Studies and editor of Too Much, an online newsletter on excess and inequality.